IQ, Expectations, and Choice

78 Pages Posted: 24 Jan 2019 Last revised: 11 Nov 2022

See all articles by Francesco D'Acunto

Francesco D'Acunto

Georgetown University

Daniel Hoang

University of Hohenheim

Maritta Paloviita

Bank of Finland - Research

Michael Weber

University of Chicago - Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: January 18, 2019

Abstract

We use administrative and survey-based micro data to study the relationship between cognitive abilities (IQ), the formation of economic expectations, and the choices of a representative male population. Men above the median IQ (high-IQ men) display 50% lower forecast errors for inflation than other men. The inflation expectations and perceptions of high-IQ men, but not others, are positively correlated over time. High-IQ men are also less likely to round and to forecast implausible values. In terms of choice, only high-IQ men increase their propensity to consume when expecting higher inflation as the consumer Euler equation prescribes. High-IQ men are also forward-looking - they are more likely to save for retirement conditional on saving. Education levels, income, socio-economic status, and employment status, although important, do not explain the variation in expectations and choice by IQ. Our results have implications for heterogeneous-beliefs models of household consumption, saving, and investment.

Keywords: Behavioral Macroeconomics, Heterogeneous Beliefs, Limited Cognition, Expectations Formation, Household Finance

JEL Classification: D12, D84, D91, E21, E31, E32, E52, E65

Suggested Citation

D'Acunto, Francesco and Hoang, Daniel and Paloviita, Maritta and Weber, Michael, IQ, Expectations, and Choice (January 18, 2019). Bank of Finland Research Discussion Paper No. 2/2019, Available at SSRN: https://ssrn.com/abstract=3321598

Francesco D'Acunto (Contact Author)

Georgetown University ( email )

Washington, DC 20057
United States

Daniel Hoang

University of Hohenheim

Fruwirthstr. 49
Stuttgart, 70599
Germany

Maritta Paloviita

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 9 1831 (Phone)
+358 9 1832560 (Fax)

Michael Weber

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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